Stimulus money gives a boost to small start-ups

LANCASTER, Pa. -- The Community First Fund has spent 17 years proving that lending to poor people is good business. It may soon get millions of dollars in fresh capital to help press its case.

A little-known provision of the massive $787 billion stimulus law recently passed by Congress doubles federal funding for so-called Community Development Financial Institutions (CDFIs) such as Community First Fund. That includes local thrifts, banks and non-profits that serve low-income neighborhoods often ignored by large institutions or exploited by high-cost predatory lenders. President Obama's 2010 budget includes more money for the financiers, to help distressed areas hit hardest by the recession.

Overall, the stimulus law and budget plan allocate about $400 million over two years to community lenders, a huge increase from the roughly $50 million the Bush administration proposed in 2008.

That may seem like chump change compared with the trillions the Treasury Department and Federal Reserve have poured into large financial firms. But every dollar of CDFI funding should leverage $14 to $20 in economic activity, providing vital activity in low-income areas that were reeling even before the downturn.

"We are an organization that is not capitalized because our community is not capitalized. We have to try to negotiate money from the other part of town and bring it to this part of town," says Carlos Graupera, executive director of the Spanish American Civic Association, surveying a block of tidy row houses built with a loan from Community First Fund. Across the street, 12 older homes are being renovated, also with CDFI dollars. Most are presold, bringing new life into what was once a notorious drug market.

Despite the bleak economy, Graupera and Community First Fund are pressing ahead with their most ambitious undertaking: a 5-acre commercial site with riverfront access — and toxic waste issues that have scared away private developers. They will bear the cost and risk of cleanup, on the bet it will make the site attractive enough that private funding will flow in to build housing and stores.

Because CDFIs see their primary role as stabilizing local economies, rather than generating big profits, they are eager to expand lending using stimulus funds. Some big banks, by contrast, have remained tight-fisted even with federal bailout dollars. Business lending at the largest U.S. banks plunged in February, the Treasury Department said. Demand has doubled at some of the nation's 800-plus CDFIs as anxious borrowers seek financing.